Rule One Investing Blog

Today KSwiss (KSWS) released the fourth quarter report. KSwiss reported fourth-quarter net income of $0.6 million, or $0.02 per share, compared with $10.7 million, or $0.30 per share, a year earlier. So, definitely a drastic decrease from last year. However, being the optimist that I am I really like the comments of the CEO today,

“We’ve been saying for several quarters now that domestic business will be weak until at least late in 2008,” Nichols said. “From what we have seen in the retail environment as of late and order indications, that expectation needs to be extended until 2009.”

He goes on to state that the dramatic decrease in sales is directly related to domestic growth. And a small glimmer of hope can be seen in the international market which had an increase in sales.

“Worldwide revenue and backlog are down overall on continued weakness in the domestic market, while international revenue is up albeit at a slower pace in the fourth quarter than we experienced earlier in the year.”

Anyway, it looks like KSWS has had a tough year. I’m still going to keep my eye on this stock. I don’t expect to purchase anything till the market strengthens.

Lowes (LOW) released it’s fourth quarter report today with some interesting news. Normally when a company releases a statement saying “lower then last years quarter earnings” the stock decreases. However, because the market has drastically undervalued these stocks they expected even worse news. Therefore, the “lower earnings” were better then expected, according to the market. If that makes any sense?

It’s an interesting point to consider as a Rule One Investor. If the company did worse then last year in the fourth quarter what does that mean?

Well, obviously we need the whole year and the previous 9 years to make an appropriate statement. However, this does show that the growth rate is probably falling. A decreasing growth rate is not something that a rule one investor wants to be concerned with. It makes the business less predictable.

Does it matter that the stock price actually increased? No! It would matter if we were buying or selling the stock, however, I don’t have a position in the stock as discussed when I was selling my Lowes (LOW) stock. The price increase is simply a reajustment because of the undervaluation of the stock.

I am waiting to see the annual report to recalculate the Rule #1 numbers and see if Lowes still qualifies as a rule one stock.

In my last article I talked about how KSwiss’s current stock price is currently below the margin of safety. Therefore, it’s important to delve deeper into this company immediately. As soon as you find a stock below the Margin of Safety I think it’s important to analyze the company to determine if it’s worth putting on your possibly buy list.

What is KSwiss?

Kswiss is a company that designs, develops and markets high performance footwear and apparel. As well, they market and design casual footwear. Which is how I know KSwiss. I know KSwiss from products like the shoe to the right.

Who are the consumers?

From the company description it looks like the consumers are sports fanatics and the modern teenager to young adult. As we know these people are large consumers.
Where can I buy KSwiss?

I like to do is determine where people can actually buy the product. I find that this is especially useful for retail stocks. If you can’t get a specific brand at certain stores / locations then this shows some sort of block in the moat or management. Looking online you can buy KSwiss from Foot Locker and Eastbay.com. On ebay there are over 300 items when searching for KSwiss

How’s the Management?

This is always the toughest question. However, if we look at the annual report from 2007 we can see that the CEO seems like a straight shooter.

The athletic footwear industry is highly competitive. There are several marketers of footwear larger than us, including Nike and adidas. Each of these companies has substantially greater financial, distribution and marketing resources as well as greater brand awareness than us.

We have increased our emphasis on product lines beyond our Classic model. In the past, we have introduced products in such highly competitive categories as court, boating, outdoor and children’s shoes. See “Products.” There can be no assurance that we will penetrate these or other new markets or increase the market share we have established to date.

The principal elements of competition in the athletic footwear market include brand awareness, product quality, design, pricing, fashion appeal, marketing, distribution, performance and brand positioning. Our products compete primarily on the basis of technological innovations, quality, style, and brand awareness among consumers. While we believe that our competitive strategy has resulted in increased brand awareness and market share, there can be no assurance that we will be able to retain or increase our market share or respond to changing consumer preferences.

 

Those are the sort of remarks that I can relate to meaning, “we can’t be assured that we’re doing these things, however, we believe this approach might work.”

What about the CEO, Steven Nichols?

Well, Mr. Nichols seems like our kind of player. He’s been on the board since 1987. He also holds a LARGE amount of stocks, over 70% of the voting power stocks. In addition, he only took 1 million as compensation for his work on the board.

Finally, KSwiss has a conference call on Tuesday to report the fourth quarter earnings of 2007. This should give us a great idea of the outlook for 2008. Furthermore, it’ll show us what kind of management we have. I’ll be sure to watch carefully on Tuesday.

Sorry it’s been so long that I’ve posted. I have some other web endeavors that are currently taking up more time then usual. Luckily, they’re starting to wind down and I can finally get back to this blog. Fortunately, rule one allows us to get busy with other endeavors once we have money invested as all we have to do is check our current stocks for the daily progress.

Anyway, in my last few articles I’ve been discussing how I am going about selecting my Rule One stocks. I’ve dealt with purely the rule one numbers, the Moat and in this article I’ll discuss the margin of safety (MOS) of the remaining stocks. Remember, these are simply my margin of safety numbers and could be completely incorrect. You should process the numbers and make your own conclusions.

• Sports
  • Nike (NKE)
    • MOS: $34.07
    • Current Stock Price: $60.59
  • Sketchers (SKX)
    • MOS: $12.15
    • Current Stock Price: $22.24
  • Deckers (DECK)
    • MOS: $92.59
    • Current Stock Price: $120.88
  • KSwiss (KSWS)
    • MOS: $17.72
    • Current Stock Price: $16.73
  • Pool Corporation (POOL)
    • MOS: $12.21
    • Current Stock Price: $19.24
  • Columbia Sports Wear (COLM)
    • MOS: $32.47
    • Current Stock Price: $43.63

As we can see only KSwiss has a margin of saftey under the current stock price.  Therefore, it’s worth taking a more indepth of the company and management of KSwiss.   My next few articles will delve deaper into KSwiss. What’s the market? Who are the consumers? What’s the future outlook?  How’s the management?

In the past two articles I’ve discussed Creating a Meaningful Stock list and Analyzing Sports and Recreation Stocks. In this article, I’m going to analyze the moats and on the remaining companies on the list.

• Sports
  • Nike (NKE)
    • Moat – Definitely! Who doesn’t wear Nike nowadays.
  • Sketchers (SKX)
    • Maybe. They provide contemporary footwear for young people. I’d say yes definitely but is Sketches just a fashion trend? That’s what needs to be determined from this company.
  • Deckers (DECK)
    • Yes. They provide designer comfort shoes.
  • KSwiss (KSWS)
    • Yes, a brand moat. Lots of people are getting KSwiss footwear as it’s a good name. Only downfall is they’re competing against Nike though.
  • Pool Corporation (POOL)
    • Yes. One of the leading companies to provide pool supplies and equipment.
  • Jakks Pacific (JAKK)
    • Yes/No/Maybe. I really can’t say whether this has a moat or not. If someone can explain their moat to me I’d be more interested. However, right now I don’t know enough about this company to say yes or no to a moat.
  • Columbia Sports Wear (COLM)
    • Yes. A moat of providing mid-quality outdoor wear for the recreational outdoor enthusiast. Although, North Face and others are starting to breach the moat.
  • Dicks Sporting Goods (DKS)
    • Not really. I’m not based in the states so it’s tough to completely determine if this has a moat. I’m sure there are other stores in the states that sell sporting goods.

Have you finished reading Rule #1 Investing by Phil Town? Have you started searching for a stock that’s under the MOS? Are you starting to get frustrated that you haven’t found anything that meets the Rule #1 requirements?

Here’s a few tips and tricks to ensure that you don’t give up on the rule one technique.

• Just start by looking at the stock numbers. Ignore, the other three M’s for now. Ensure that the growth rates are appropriate. This will weed out lots of companies. Then you can finish you’re four M analysis.
• Once you’ve assembled your initial stock list. Run the numbers through a Margin of Safety calculator. These calculators normally show the numbers all on a spreadsheet. From the spreadsheet, you can simply see if all the numbers are above 10%. This way you don’t go through all the necessary pages on Yahoo or MSN.
• When assembling a list of potential companies be sure to branch out. This means ensuring that you select all industries that are related. You might not have as much meaning but it should be easier to perform the research necessary later.
• Try looking at stocks that have large moats that you can simply think of a company and crunch numbers. The company might not have meaning for you but it’ll show you that these companies to exist. Coke (KO), Nike (NKE) or Apple (AAPL).

Remember. The reason the requirements for your business are so stringent is so that you don’t get a predictable company without a solid background. You absolutely NEED strong consistent numbers to be able to predict a future stock price, current evaluated stock price and the margin of safety stock price.

Either way. Don’t give up. Continue to search and follow this blog. You’ll eventually find a company worth of rule one status.

I’m taking a close look at the stock list that I created from last post about creating a meaningful stock list.  I’m going to go through the specific stocks and eliminate stocks that don’t fit the Rule #1 criteria.  The criteria I’m using are

• 7 years+ of history
• 10% Return on Investment Capital (ROIC) for the 5 year and 1 year numbers
• 10% Equity growth rate
• 10% EPS growth rate
• 10% sales growth

I’m not specifically going to discuss the margin of safety, sticker price, moat or management.  As well, I’m going to be less harsh on EPS and sales growth.  I’m doing this so that I can keep these companies in my radar and have a closer look at these companies in the future.

• Sports
  • Nike (NKE)
    • Yes
  • Timberland (TBL)
    • No – ROIC 7$ last year & Equity less then 10%
  • Sketchers (SKX)
    • Yes
  • Crocs (CROX)
    • No – Less then 7 years of data
  • Deckers (DECK)
    • Yes – but EPS less then 10% last year
  • KSwiss (KSWS)
    • Yes – but EPS and sale less then 10%
  • FootLocker (FL)
    • No – ROIC less then 10%
  • Under Armour (UA)
    • No – Less then 7 years of data
  • Calaway (ELY)
    • No – ROIC less then 10%
  • Harley Davidson (HOG)
    • No – Use to be a Rule #1 stock but with diminishing growth rates the past few years it is removed from our radar.
  • Brunswick (BU)
    • couldn’t find data on Brunswick
  • Polaris (PII)
    • NO – Lower then 10% on Equity, EPS, Sales
  • Pool Corporation (POOL)
    • Yes – But Equity 1% last year
  • Jakks Pacific (JAKK)
    • Yes
  • Artic Cat (ACAT)
    • No – ROIC less then 10%
  • Columbia Sports Wear (COLM)
    • Yes
  • Dicks Sporting Goods (DKS)
    • Yes – but only 5 years of data
  • Volcom (VLCM)
    • No – but with the numbers being put up could be worth a second look as a risky business
  • QuikSilver (QZK)
    • No – ROIC less then 10%

This is considered step two of my stock selection process.  I’m left with eight potential rule #1 companies.  Now the hard work begins, determining if each of these companies has some sort of moat, margin of safety and managment.  One ‘M’ and three to go.